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Theme 3 Paper 2 - Coggle Diagram
Theme 3 Paper 2
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Ratio analysis
Gearing Ratio: this shows the long term financial position of the business to show how much of the business is running on borrowed finance
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Interpreting Gearing ratios:
- if a gearing ratio is high, creditors may be concerned, as loans come with interest rates
- the business may choose to borrow instead of loan
Limitations to Ratio Analysis:
- comparisons:
- must remain accurate as businesses change, it must reflect this
- compare similar businesses
- window dressing:
- accounts must be a fair and true representation of the business, but they can be legally presented to give them a good reputation
ROCE (Return on Capital Employed): used to measure the business' profitability by comparing it with the amount of money invested
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